The Fed Misrepresenting Inflation to Justify Inept Policy

The final GDP calculation came out on Wednesday, and we have
several takeaways from this latest revision. First of all government reporting
data is all over the place, and not in a good way. I have no confidence that
any of these numbers are actually right, and second with an ever changing
economy, most of these data gathering tools are obsolete at best. The GDP
number has now become a complete farce, the components used to calculate growth
are so useless that we literally could have a plus 7% GDP quarter, and it mean
absolutely nothing regarding the real health of the US economy!

PCE & CPI both Under-Report Real
Inflation

But now we know why the Fed likes the PCE calculation for
quoting the level of inflation in the economy because it is skewed to a lower
number even with the joke that is government numbers these days regarding
inflation levels and pressures in the economy. It is bad enough that the
government keeps tweaking the CPI Data points to change what they measure in
terms of inflation, and now that this number starts rising to 0.4% for a month,
well above their targeted level, they search for some lower inflation reading
metric in the PCE measure. While the PCE number is skewed to healthcare and the
CPI to housing, both of these measures severely underreport real inflation
because most Americans cannot afford healthcare or housing.

Many Americans just avoid healthcare spending altogether and
only show up to emergency rooms when they can no longer ignore a health issue and
they aren`t paying anything here that shows up in terms of the inflation numbers
that line up with actual health care cost increases of the last decade! Another
interesting relation is that Healthcare Debt for consumers is one of the most prominent
reasons for declaring personal bankruptcy so consumers aren`t actually paying
for this healthcare further downplaying the actual real inflation that
consumers who do pay for healthcare are experiencing in the economy.

It seems with every inflation gauge they are cookie cutter archaic
and massively antiquated, i.e., created in a different era that fails to
capture the proper nuances of how consumers have adapted to higher inflation pressures.
All the inflation metrics skew towards underreporting inflation in real terms!
Take housing for example, with the state of Boomerang Kids living much longer
at home and group living arrangements out of necessity; both of these inflation
measures from a historical context severally underestimate real inflation in
the US economy!

The reason these living arrangements and the necessity for
two parent income producing households is due to much higher inflation levels
in the economy that require Americans to adapt, i.e., they cannot afford the
alternatives in practical terms relative to historical norms and an apples to
apples comparison of living standards. This is the hidden inflation that Fed
induced policy is directly responsible for, and is underreported in the real
inflation numbers based upon out of date reporting measures interpreted by outdated
economists who haven`t published anything relevant in economic theory for 20
years!

Real Inflation has been all around us for Decades, and the
last 5 years of a weak economy, has exhibited much higher inflation in Real Terms
that fail to be captured in old-fashioned inflation gauges. Furthermore, when
Inflation actually does start showing up in these “Useless Inflation Measures”
you better start paying attention because that means Real Inflation is getting
dangerously out of hand!

Real Inflation is Reducing Disposable
Income for Consumption in Discretionary Retail Spending

You want to know why retail sales numbers are so tepid, it
is due to much higher inflation levels taking a huge hit on disposable income,
average consumers are robbing Peter to pay Paul in terms of much higher food,
gas, entertainment, cable, internet, and insurance costs (our home owner`s
policy just went up 25% with no claims). Throw in higher taxes in all forms and
there is Real Inflation out in the US economy that is much higher than these ridiculously
low government numbers.

The Fed is starting to lose credibility on many fronts, and
downplaying inflation just to continue on with this process of monetizing debt
with excessive money printing is one area where market watchers are starting to
discuss privately. The Fed is sacrificing real growth by incentivizing non-productive
uses of capital by banks and corporations chasing Yield Arbitrage investments
instead of positive GDP and Job Creating policies of project and lending
investments. The Fed is maintaining this illusion through abnormally low
interest rate policies that have their own cost in terms of hurting savers, and
flattening out the yield curve further disincentivising banks to lend to
business for real economic growth opportunities. And at the same time
hamstringing consumers with higher costs in terms of Real Inflation and less
overall disposable income in their pockets!

Would the Economy actually be more
Productive without Fed Intervention?

It is looking more and more that the US economy would actually be doing much better by having the Federal Reserve just get out of all market interventions period. There are plenty of areas of strength that are
doing just fine all by their own like energy, technology and entertainment, and
actually would probably be doing much better if banks were allocating more
money to these growth opportunities, and less to paper money investing schemes.
Shoot with a negative 3% GDP quarter inflation should have been negative, which
should scare the heck out of the Fed in terms of what is really going on with
inflation right now!

The central banks need to downplay inflation, underreport
it, and find metrics that support their case of low levels of inflation in the
economy. They are talking their proverbial book, justifying their policies of
the last five years, and even their existence as a necessary function in the
economic wheel. As it is starting to really manifest itself, the idea that the
economy would in fact be doing much better all on its own with no Fed
involvement whatsoever, let alone that their policies have any beneficial
impact on spurring economic recovery and growth!

The Inflation Lie & the Fed`s
Ultimate Power and Credibility Demise

And the more they speak about economics, the economy, policy
tools and their impact on society it becomes apparent that this discipline ‘economics’
has lost its way, and I am afraid that the inflation lie is what is going to be
their undoing. As that is the nasty part about inflation, if you disrespect it,
downplay it, fail to keep it in check, once it breaks out for all to see, and
in undeniable fashion, by the time the Fed realizes it is a problem, because it
is so enormously apparent in the numbers, it is far too late to do anything
about it! We are basically right at the cusp of this inflation stage right now,
and the Fed is asleep at the wheel, trying to justify their whole existence and
tenure of failed policies of the last two decades, needing to hold onto the low
inflation meme to continue the status quo!

Better Results Just Sending Monthly
Checks to Average Citizens

The Federal Reserve is such an inept body at this point, literally
spending 4 Trillion with these subpar anti-growth monetary initiatives that
have really elevated inflation for five years well beyond an economy growing at
2% annually, which has inevitably hurt consumers in terms of real disposable
income, and at the same time incentivizing paper investments over project
investments.

It could seriously be argued that the Fed would have had
much better results in stimulating economic growth by actually giving the 317
million citizens an annual check, or a monthly check instead of buying bonds,
downplaying inflation and keeping interest rates in fantasyland compared to
historical norms.

The Law of Unintended Consequences

Unhealthy interest
rates are going to foster unhealthy investments, and ultimately are going to
lead to unhealthy economic outcomes, when will they ever learn the Law of
Unintended Consequences? Moreover, when calling outright Inflation “Noise” to
continue on the path of exacerbating these “Unintended Consequences” it is time
for a house cleaning at the Federal Reserve – get rid of the economists and
start putting some entrepreneurs and small business owners on the Board. The
career “Academic Has-Beens” from the economics field have been an abysmal failure
for the last 20 years, it is time for a rethinking of what and who constitutes
the Federal Reserve Board!